Trudy and Tom are close to having the mortgage on their Vancouver house paid off and are wondering how best to use the extra money.
He is 51, she is 48. Both work reduced hours in the education field and both have work pension plans. Their next goal, after the mortgage, is to help their 13-year-old child pay for postsecondary education in another city.
"We own a small home with a rental suite," Tom writes in an e-mail. "We don't exactly pay attention to finances except to try and spend less than we make, and max out our RRSPs and registered education savings plan," he writes.
"We make ends meet and are guessing that our pensions will be reasonable [they started their careers in their mid-30s], but have the upcoming cost of postsecondary – preferably far from home!"
Trudy and Tom wonder when they might be able to scale back their work further or retire "and when we should stop putting money into RRSPs and shift to tax-free savings accounts," Tom adds.
"We would also like to build a laneway house, which would allow us to create some more badly needed rental housing in our neighbourhood, but are unsure if this makes sense financially."
They plan to retire at the age of 60 with $80,000 a year after tax.
We asked Ethan Astaneh, a financial planner at RGF Integrated Wealth Management Ltd. of Vancouver (formerly Rogers Group Financial), to look at Tom and Trudy's situation.
What the expert says
At this critical transition point in their lives – becoming debt-free – Tom and Trudy need a plan that finds a balance between objectives that compete with one another for resources, Mr. Astaneh says. He suggests goals-based planning whereby each goal is assigned a time horizon and capital targets.
First he looks at education savings. "Assuming the annual cost of tuition and books is $10,000 for a Canadian university, and annual living costs (room and board) are about $15,000, the total amount required to support a four-year undergraduate program is $100,000," the planner says. Working backward from what is already in the RESP, and the contributions they are making, "it appears they will need to save about an additional $400 a month for the next five years."
Next, he looks at the couple's retirement goals. "This goal is clearly defined – a net income target of $80,000 a year starting at age 60," Mr. Astaneh says. Much of their retirement income need will be met by their work pensions, government benefits and rental income, the planner says.
"However, some additional capital will be required."
Their retirement income breaks down as follows: Trudy will get $2,290 a month of pension income plus a bridge benefit of $124 to the age of 65. Tom will get $1,767 of pension income plus a bridge benefit of $119. The planner estimates they will each get $471.68 of CPP benefits and $650 each of rental income. At the age of 65, they will each get $580 a month in Old Age Security (OAS) benefits.
So starting at the age of 60, they will get a combined $6,543.36 a month, rising to $7,460.36 a month ($89,524 a year) at the age of 65 when they begin collecting OAS and their bridge benefits cease.
To achieve their $80,000 spending goal, they will need gross income of $95,000. "So before age 65, just over 82 per cent of their income need is met by defined sources and after age 65 the number increases to 94 per cent," the planner says.
To meet their goal, they would need enough of an investment portfolio to draw $17,000 a year starting at the age of 60 and $5,480 a year from the age of 65 onward. "If they have $200,000 in RRSPs by age 60, they will have enough, with a small buffer," he says. This assumes an average annual return on investment of 5 per cent.
Mr. Astaneh sounds a note of caution about Trudy and Tom's retirement plan. "The gap in their financial trajectory is that there are no provisions for contingencies in retirement," the planner says. To remedy this, he suggests they open tax-free savings accounts (TFSA) and start building savings there.
"If, when they become debt-free, they save $1,500 a month toward TFSAs, the value accumulated in those accounts will be about $225,000 at retirement," Mr. Astaneh says. That assumes 5-per-cent annualized growth. "This is an important resource for retirement because having access to a tax-free pool of capital for emergencies or late-in-life health care expenses protects them against the uncertain future."
As for retiring even earlier than the age of 60, he's doubtful. Further reducing their work hours could have an adverse impact on employer pension entitlements and Canada Pension Plan (CPP) benefits, the planner says, noting that both Tom and Trudy started their careers late and will already be accepting reduced pensions and CPP at the age of 60.
"Reducing work or retiring early adds an element of risk to their retirement outcome, so unless their plan is to downsize the house in the future, and cash in on some of their home equity, it is not recommended."
Finally, the laneway home, which they estimate would cost about $350,000 to build. They'd finance it with a mortgage or line of credit in exchange for rental income of $2,300 a month. "While this can be done without threatening their retirement plans, it will not result in a meaningful change to their cash flow position until the $350,000 debt is paid off," Mr. Astaneh says.
The people: Tom, 51, Trudy, 48, and their teenager.
The problem: Where best to direct money that was going to paying off the mortgage.
The plan: Add to RESP savings, stop RRSP savings, open TFSAs and save the maximum to them.
The payoff: Goals met.
Monthly net income: $12,170
Assets: Cash $2,500; his RRSP $74,200; her RRSP $71,250; RESP $55,850; estimated present value of his pension plan $204,000; estimated present value of her pension plan $265,000; residence $2,000,000. Total: $2,672,800
Monthly outlays: Mortgage $1,840; property tax $490; insurance $120; utilities $100; maintenance, garden $400; car insurance $385; parking, transit $355; other vehicle $360; grocery store $740; clothing $400; line of credit $10; charitable $30; vacation, travel $600; dining, drinks, entertainment $555; club memberships $100; pets $20; sports, hobbies $575; subscriptions $75; doctors, dentists $80; phones, internet $165; RRSPs $425; RESP $210; pension plan contributions $1,630; professional associations $200; group benefits $250. Total: $10,115
Liabilities: Mortgage $20,000; line of credit $3,500. Total: $23,500
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